Working Paper
Interest-Rate Liberalization and Capital Misallocations
Abstract: We study the consequences of interest-rate liberalization in a two-sector general equilibrium model of China. The model captures a key feature of China's distorted financial system: state-owned enterprises (SOEs) have greater incentive to expand production and easier access to credit than private firms. In this second-best environment, interest-rate liberalization can improve capital allocations within each sector, but can also exacerbate misallocations across sectors. Under calibrated parameters, the liberalization policy can reduce aggregate productivity and welfare unless other policy reforms are also implemented to alleviate SOEs' distorted incentives or improve private firms' credit access.
JEL Classification: E44; G18; O41;
https://doi.org/10.24148/wp2017-15
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Bibliographic Information
Provider: Federal Reserve Bank of San Francisco
Part of Series: Working Paper Series
Publication Date: 2019-10-23
Number: 2017-15
Note: The first version of this paper was published May 2017.